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Where Are All the Dollars?
FYI
The close to $1500 currency per person in
Canada, and over US$2000 of U.S. currency
per person in the United States, are surpris-
ingly large numbers. Currency is bulky, can
be easily stolen, and pays no interest, so it
doesn t make sense for most of us to hold a lot
of it. Do you know anyone who carries $1500
in their pockets? We have a puzzle: where are
all these dollars and who is holding them?
One group that holds a lot of dollars are
criminals. If you were engaged in illegal
activity, you would not conduct your transac-
tions with cheques because they are traceable
and therefore a potentially powerful piece
of evidence against you. This is why Tony
Soprano had so much cash in his backyard.
Some businesses also like to hold a lot of
cash because if they operate as a cash busi-
ness, which makes their transactions less
traceable, they can avoid declaring income
on which they would have to pay taxes.
The other group that holds Canadian and
(to a larger extent) U.S. dollars are foreign-
ers. In many countries, people do not trust
their own currency because they often expe-
rience high inflation, which erodes the value
of their currency; these people hold dollars
as a hedge against this inflation risk. Lack of
trust in the ruble, for example, has led
Russians to hold enormous amounts of U.S.
dollars. In fact, over half the quantity of U.S.
dollars are held abroad.
3
Joseph Atta-Mensah and Loretta Nott, Recent Developments in the Monetary Aggregates and Their
Implications,
Bank of Canada Review
(Spring 1999): 5 19, provide an excellent discussion of the
recent behaviour of Canada s monetary aggregates.
Because we cannot be sure which of the monetary aggregates is the true
measure of money, it is logical to wonder if their movements closely parallel
one another. If they do, then using one monetary aggregate to predict future
economic performance and to conduct policy will be the same as using
another, and the fact that we are not sure of the appropriate definition of
money for a given policy decision is not too costly. However, if the monetary
aggregates do not move together, then what one monetary aggregate tells us is
happening to the money supply might be quite different from what another
monetary aggregate would tell us. The conflicting stories might present a con-
fusing picture that would make it hard for policymakers to decide on the right
course of action.
Figure 3-1 plots the growth rates of M2 (gross), M1++ (gross), and M2++ (gross)
from 1969 to 2008. The growth rates of these three aggregates do tend to move
together. Yet some glaring discrepancies exist in the movements of these aggregates.
The average growth rate of money in the 1970s was 14.2% according to M2 (gross),
11.9% according to M1++ (gross), and 15% according to M2++ (gross). The average
monetary growth rate in the 1990s was 3.6% according to M2 (gross), 2.7% accord-
ing to M1++ (gross), and 6.6% according to M2++ (gross). Thus, the different mea-
sures of money tell a very different story about the course of monetary policy.
From the data in Figure 3-1, you can see that obtaining a single precise, cor-
rect measure of money does seem to matter and that it does make a difference
which monetary aggregate policymakers and economists choose as the true mea-
sure of money.
The measures of the money supply listed in Table 3-1 make black-and-white deci-
sions about whether a given asset is money by including it or excluding it. In addi-
tion, these measures are simple-sum indices in which all monetary components
are assigned a constant and equal (unitary) weight. This index is
M
in
M
=
x
1
+
x
2
+ . . . +
x
n
where
x
j
is one of the
n
monetary components of the monetary aggregate
M
. This
summation index implies that all monetary components contribute equally to the
money total and it views all components as dollar-for-dollar perfect substitutes.
Such an index, there is no question, represents an index of the stock of nominal
monetary wealth, but cannot, in general, represent a valid structural economic
variable for the services of the quantity of money.
C H A P T E R 3
What Is Money?
53
1
9
6
9
1
9
7
3
1
9
7
1
1
9
7
5
1
9
7
7
1
9
7
9
1
9
8
1
1
9
8
3
1
9
8
5
1
9
8
7
1
9
8
9
1
9
9
1
1
9
9
3
1
9
9
5
1
9
9
7
1
9
9
9
2
0
0
1
2
0
0
3
2
0
0
5
2
0
0
7
2
0
0
9
A
n
n
u
a
l
G
ro
w
th
R
a
te
(%
)
M2 (Gross)
M1
(Gross)
M2
(Gross)
10
0
10
20
30
F I G U R E 3 - 1
Growth Rates of M2 (Gross), M1++ (Gross), and M2++ (Gross), 1969 2008
Source
: Statistics Canada CANSIM II Series V41552796, V37152, V41552801.
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